In the Autumn Budget delivered by Rachel Reeves on 30 October, a number of significant changes were made to taxes, tax thresholds and existing exemptions that will affect the tax you pay, in some cases with immediate effect.
Some of the most notable changes affecting individuals were to capital gains tax (CGT), inheritance tax (IHT), and pensions. Read on for the details of each change, what it means for you, and how schemes like EIS can help. Please note, that we are not tax advisers, and any decisions around making investments for tax purposes should be discussed with an adviser familiar with your personal circumstances.
Capital gains tax has increased, effective immediately.
What’s changing?
“Capital Gains Tax (CGT) will increase from 10% to 18% for those who pay the lower rate, and 20% to 24% for those who pay the higher rate. These new rates will match the residential property rates, which will remain unchanged at 18% for the lower rate and 24% for the higher rate.”
What does that mean for me?
Effective immediately – as of 30 October 2024 – You’ll pay more tax when you sell an asset at a profit, whether its shares, personal possessions worth over £6,000 (with the exception of cars), or business assets, but the tax you’ll pay on any profit from the sale of a second home won’t change.
How does EIS help?
Capital gains deferral relief
EIS lets investors defer capital gains and treat them as if they have not yet arisen for the length of time that they hold their EIS shares. You get a four year window to do this, you just need to be issued your EIS shares in the period beginning one year before, and ending three years after, the date the gain arose.
You can defer as much or as little of a capital gain as you choose, the amount you invest is the amount you can defer. So, you can defer the entire gain if you choose, and pay no capital gains tax on that gain until you decide to sell your shares. Or you can invest a sum equal to 50% of the gain, and just pay 50% tax now, and defer 50%.
It is possible to defer capital gains indefinitely, either by holding on to your shares, or, if you choose to sell them, investing in more EIS shares and deferring the gain again. Capital gains disposal relief
Provided you have held your EIS shares for three years, any gain realised from their sale will not be subject to capital gains tax. So if you invested £10,000 in an EIS fund and one of the companies in your portfolio exited at a profit, leaving you shares worth £100,000, there would be no capital gains tax payable on that gain – £90,000 – when you sold them. Note, you must have claimed income tax relief on your shares in order to be able to claim disposal relief on them.
From April 2027 inherited pension pots will be subject to inheritance tax.
What does that mean for me?
While pensions are intended to fund retirement, to an increasing degree, their exemption from inheritance tax (IHT) saw them used as a means of transferring wealth to beneficiaries free of inheritance tax. The fact that they are now subject to inheritance tax makes them much less attractive as a method for moving wealth outside the chargeable estate. Savers and investors alike may which to adjust their retirement planning approach, and invest in products which provide IHT relief.
How does EIS help?
Provided they are held for two years, EIS shares are exempt from inheritance tax under business property relief rules, provided they fall within the £1m allowance introduced in the 2024 Autumn Budget. This means investors looking to obtain inheritance tax exemption for a portion of their estate can make use of EIS to do this in a shorter time than the general gifting process, which requires assets to be gifted seven years prior to death.
Inheritance tax: £1m allowance for IHT relief via business relief on business assets from April 2026
What’s changing?
From April 2026, agricultural property relief and business property relief will be reformed. The highest rate of relief will continue at 100% for the first £1 million of combined business and agricultural assets on top of the existing nil-rate bands, fully protecting the majority of businesses and farms. The rate of relief will reduce to 50% for assets that surpass the tax free threshold.
Inheritance tax: AIM shares only receive 50% IHT relief from April 2026
What’s changing?
Shares designated as 'not listed' on the markets of recognised stock exchanges, such as AIM, will see their business property relief fall to 50% of the normal inheritance tax rate in all cases.
What does that mean for me?
It means that any assets exempt from IHT under business property relief or agricultural property relief beyond a £1m allowance (on top of existing nil-rate bands) will receive 50% relief, instead of full relief.
From April 2026, AIM shares will be liable for IHT, but at 50% of the normal rate: 20% IHT instead of 40%. Beyond the existing nil rate band of £325,000, these assets do not receive the £1m tax-free allowance applied to business and agricultural assets.
This means that those investors buying AIM shares in order to claim IHT exemption via business relief will be liable for IHT of 20% on those shares. Unless investors are confident that the return on their investment is sufficient to justify the tax these assets are now liable for, they may wish to allocate funds elsewhere.
How does EIS help?
EIS investments receive 100% inheritance tax relief, provided that the total value of the assets upon which you intend to claim business relief does not exceed £1m.
For investors looking for a way to move assets outside of the chargeable estate for IHT, it now makes more sense to invest in EIS and benefit from 100$ tax relief, (plus capital gains diposal and deferral relief, income tax relief, and loss relief) rather than investing in AIM shares just to qualify for business relief and paying IHT of 20% on those shares.
Beyond the tax changes
Outside of the changes made to tax this year, there is the broader economic climate to consider. Many investors view EIS investing as an opportunity to diversify outside of investments in public companies, which can be a sensible long-term approach during a recession (see our article on this). EIS is a long term investment, taking at least five, and probably ten or more years to mature, and while small companies also feel the pain in a downturn, private markets are less subject to the fluctuations seen in the public markets. In many cases, smaller companies can manoeuvre through a downturn in ways larger companies cannot.
We haven’t even talked about the returns yet.
With so many tax reliefs available through EIS, it’s easy to forget that it also offers the potential for significant returns. This is largely because it is a high risk investment, many startups fail, and returns are never guaranteed.
But when they happen, they can return large multiples to investors. As a general target, most funds work to a 3x return estimate based on growth averages. But you might build a portfolio containing companies that hit 5x, 10x, even 100x or higher. Startup returns follow a power law distribution, which means that a small proportion of the total startup population accounts for the lion's share of returns. Many startups will fail, and many might show reasonable growth. But a small number will see exponential growth, becoming the unicorns of the future.
This potential, taken along with the tax reliefs, may make investing in EIS an attractive opportunity for some investors in today’s climate.
Where to start with EIS investing.
The most straightforward way to get started with EIS investing is to invest in an EIS fund. Funds will deploy your investment into individual companies, conduct the necessary due diligence, and build you a portfolio. You’ll receive EIS3 certificates after you’ve made your investment, and can use the information they provide to make your claim for tax relief. You can also invest into individual companies outside of a fund, but this can bring with it a more significant administrative burden, and you’ll need to conduct the appropriate due diligence on companies you choose to invest in.
The Access EIS Fund
Our fund co-invests with proven angel investors to build large portfolios of hand-picked companies for our investors. It’s a high risk investment, but we’re confident that our approach is the smartest on the market. Even better, we can show you the data to prove it.
To find out more about how the Access EIS Fund can work for you or your clients. Use the button below to schedule a call with our expert, Tom Britton.
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